Savings hero

question

Posted by: | 2013-08-29 15:34

I am a 42-year-old who is only now starting to plan for retirement. Yes I know it's late, that is why I need advice.

I have a pension plan through my company, but it's not very big as I have only recently started working here. In the past I have always used my pension payouts. I am looking for an additional investment option that I can run concurrently.

expert answer

Posted by: Jeanette Marais | 2013-09-04 15:04

Fear not, all is not lost. While starting as early as possible is preferable, it is
still possible to make provision for your retirement starting at 42.

But you’ll have to save harder, work for
longer, and invest wisely so that what savings you do have, achieve the best
possible returns.

Ultimately
your retirement income is a factor of how early you started saving, how much
you’ve saved, the investment returns you’ve enjoyed and the amount lost through
not preserving your pension or provident fund savings when you changed jobs.

When you reach your forties, you can only influence two factors: how much you
contribute and the investment choices you make. It’s too late to think about
starting early, and the retirement money you cashed in between jobs is long
gone.

The rule
of thumb for retiring independently is that you will need a capital sum of
15-20 times your final annual pre-tax income. This will give you an income
equal to about 70% of your income at a retirement age of 65 (if you buy a
conventional pension-providing product).

Given
your personal circumstances, to achieve this level of income (70% of final
salary) you will need to save about 30% of your salary, or achieve an
investment return of 15% above inflation.

Both seem daunting, but there are
ways to lessen the burden. If you can achieve an investment return of 7% above
inflation, you’ll have to save a bit less - around 25% of your salary.

And if you work until 70 instead of 65 and
earn a regular return of 7% above inflation, you’ll only have to save about 12%
of your salary.

Alternatively, you could
plan to retire on 50% of your current income instead of 70%, which is possible
if you’re debt-free and in good health.

You also
need to make sure your investment choices are not too conservative. Equities
have outperformed all other asset classes over time and it is essential to
include them in your portfolio for real growth.

However, they also come with volatility, though this tends to smooth out
over the long term.

You
mention that you have a pension plan through your company and that you are
looking for an additional investment option.

When deciding which investment product best suits your needs, you need
to consider when you’ll need to access your investment, how it will be taxed
and what happens to it in the event of your death.

You also need to consider
fees. A retirement annuity fund (RA), a discretionary unit trust investment or
an endowment policy are all possible options.

The
biggest advantage of RAs is their tax-efficiency. Many RAs are offered with low
product fees and offer choice and flexibility.

You can stop and start
contributions without penalties, you can choose which underlying unit trusts to
invest in (as long as your selection complies with the asset allocation limits
for retirement funds prescribed by regulation), and switch between funds at no
extra cost.

However, you cannot usually access
your money until you turn 55. At retirement, a minimum of two-thirds of the
capital in your RA must be invested in a pension-providing vehicle.

An endowment
policy, meanwhile, also has certain tax advantages and while you are not bound
by retirement fund regulations, withdrawals and additional contributions are
restricted.

It can be a good medium- to long-term investment for higher income
earners with a high marginal tax rate. But your money will be tied up for a minimum of five years.

Another option
for you is to invest directly in unit trusts of your choice. Unit trusts are a
cost effective way to invest in a wide range of assets, such as shares, bonds
and property.

While you are allowed to access your money at any time, it’s best
to use unit trusts for medium- to long-term investment goals. If you go this route, you are not bound by
retirement fund regulations.

When it comes
to investment products, sometimes there may be multiple products that could
meet your needs.

If you are not comfortable making these decisions on your own,
or do not have the time to do so, it may be useful to engage the services of an
independent financial adviser.

Fin24 cannot be held liable for any decisions made based on the advice given by independent experts, and disclaims all responsibility or liability for any damages whatsoever resulting from the use of the site

user comments

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Posted by: Morrungulo | 2016-04-02 05:55

At the rate our government is destroying the value of the rand it may be prudent to hedge a portion of your investment cash offshore in GBP. - 10 years ago a pound cost R10.70 now R20.90! Not a bad 100% growth. Save offshore and maybe in 10-15 years you may just be swopping each GBP1000 monthly tranche for R40,000. Not a quick fix but time in the market may reduce your risk?

Posted by: lucky HL | 2014-04-24 15:33

I am training as a junior engineer at esokm very interested in enterpreneurship,the world of investment, accumulation of wealth but is seems like i fail to understand the simple rules of each, SOLO JHB please tell me how the growth of property in SA by 6.3% AND inflation of 6.3% makes it the worst idea to invest in property.

Posted by: Anonymous | 2013-09-05 15:54

Posted by: Nick | 2013-09-05 17:28

Hi Anonymous
You are quite right, shares and ETF's are a great form of investment. If you know what you are doing and watch the markets every day. They are however a very aggressive form of investing and considering the lady in question only has just over 20 years to retirement it would be foolish to take that risk as she does not seem have a fall back in the case of either one performing badly.
If you are making money however, well done!

Posted by: Markham Adams | 2013-09-05 14:38

The Real (take note of the punt) focus should be aggressive/real Returns for your Money. Investing your money with gurantees of 50% below inflation rate is precisely why 80% retire poor, both financially & physically. Invest first in your Health, all three (3) yes three facets of it ( Soul, Mind & Body) then retirement will be a absoluut blast.

Posted by: JP van der Watt | 2013-09-05 12:27

Whoever decided that the 40 year plan was a good idea must’ve been nuts! How can life be fun to work for 40 hours a week, for 40 years and retire on 40% of your income? If you start working at the age of 25 and you are lucky to retire at 65 you will only earn 480 pay checks. Deduct all the tax you need to pay; you end up with 280 pay checks. Only 280 pay checks! That is way 96% of people is either dead, or dead broke at the age of 65, 3% can afford to retire and only 1% can retire being wealthy. If you are sick and tired of this thing called a JOB and want to make a change in your life please do contact me. I’m working on a 2-5 year plan, where I can retire after 5 years of hard work. I can do this through a fun and innovative business model called social entrepreneurship. So if you are looking at escaping the rat race feel free to contact me at jpwatt7@gmail.com. To your success!

Posted by: Anonymous | 2013-09-05 11:29

Posted by: Anonymous | 2013-09-05 13:36

So true! to make matters worse no the inflation rate is on average 6%. However there is a different inflation rate that no one talks about that is called household inflation. To achieve the authors figure you would have to earn at least a 13% return on your investment. The truth is you are wasting your time with these type of investments. You are making other people rich with your money, and you will have nothing at retirement. If you want to learn look up Dr Hannes Dreyer or Work your wealth. Ask people like this author how many people has he hellped to be well off at his retirement age. The only one will be him who is getting rich on the commisions of your money, not you

Posted by: SoloJHB | 2013-09-05 13:29

SA Property is currently growing at 6.3% and inflation is 6.3%. Property is the worst idea. Aggressive saving and aggressive investing is this persons only saviour